Friday, March 4, 2011
Posted by D. Daniel Sokol
Pedro Gomis-Porqueras (School of Economics, Australian National University), Benoit Julien (School of Economics, University of New South Wales), and Chengsi Wang (School of Economics, University of New South Wales) have posted Pricing, Advertising, and Market Structure with Frictions.
ABSTRACT: This paper develops a model of pricing and advertising in a matching environment with capacity constrained sellers and uncoordinated buyers. Sellers’ search intensity attracts buyers only probabilistically through costly informative advertisement. Equilibrium prices and profit maximizing advertising levels are derived and their properties analyzed. The model generates an inverted U-shape relationship between individual advertisement and market tightness which is robust to alternative advertising technologies. The well known empirical fact in the IO literature reflects the trade-off between price and market tightness matching effects. Finally, in this environment we can alleviate the discontinuity problem, allowing for unique symmetric equilibrium price to be derived.